Tuesday, August 20, 2013

Every August, Texans take a break from their normal routine of eating great BBQ, shooting excellent firearms, and wearing the state flag in every conceivable manner, and participate in that great American activity: shopping.

"Big deal," I can hear you thinking. "Everyone shops, right?" Well yes, Texans have sartorial needs too. But each August, in addition to its no-income-taxes-ever policy, Texas ALSO suspends sales tax on certain back-to-school purchases, including clothing under $100, for an entire weekend. Happily, Texas avoided the intuitive but burdensome slogan "Taxes is just another way to spell Texas," and instead has famously low tax rates.

A simple Google search reveals that tax-free weekend has been happening since 1999, and CBS reported that it results in

Texas: Cutting taxes since before
Y2K!

approximately $8 saved by consumers for every $100 spent, and nearly $79 million in state and local taxes that will not be collected Friday through Sunday."

This is a little tricky to estimate, though, because the tax break is designed to boost sales as parents do back-to-school shopping. It's a high-revenue weekend, but the rebate drives additional sales. Thus, it's hard to know by how much bargain-driven shoppers are increasing their spending, and thus where the number would be without the shopping boost. Still, let's take the numbers the nice journalists provided for us, and dig in.

If consumers are saving $8 for every $100 spent, that's eight cents on the dollar. Hardly going to make or break the budget one way or the other, but resulting in an alleged loss of $79 million. On its face, this sounds crazier than a Nicki Minaj hairstyle. But I think it's actually pretty brilliant.

Gemstones. Also multifaceted.

Tax policy is a multifaceted debate, but this provides a nice opportunity to do some isolated analysis. First, we're only dealing with sales tax for a single weekend. Yes, $79 million is a gigantic number. But it's not like we completely suspended taxes forever (property tax, the main revenue driver in a no-income-tax state, was not suspended for a back-to-school special). Additionally, many businesses are not open on the weekends, not all businesses charge a sales tax, and only certain items are eligible for the tax-free status. The government will not shut down.

Second, since this is a long-standing tradition (awkward moment where you realize that 1999 was actually a long time ago), people expect it and can plan their shopping accordingly. If consumers are planning to drop a hefty chunk of change already, they're usually more willing to purchase additional items, thus boosting them into higher amounts saved. Suppose a family would normally buy $185 of back-to-school items over three weeks of piecemeal shopping—with $14.80 in taxes, the total is $198.80. Suppose that same family, incentivized to buy a little more, now spends $200 on back-to-school items in a single weekend. The

The House of [Cheap] Shoes.

end price is about the same, but you can think of it as either getting $15 in "stuff," or keeping $16 that you otherwise would have had to spend. Either way, that's a great-looking pair of sale shoes (yes, I really have bought shoes for under $15, and yes, they look great).

Third, stores will run tax-free weekend specials to stretch dollars even further. This allows them to concentrate sales on a single weekend and actually charge full-price at other times, which helps reverse the trend to constantly cut prices at the expense of profit margins. Retail isn't necessarily representative of all business, but it's the business that consumers tend to think of most immediately. Stores can thus drive sales, which ultimately allows them to stay in business, employ people, and provide stylish clothing for the masses.

Fourth, tax-free weekend creates a perverse incentive to shop, because it creates crowds. There really are some people who would rather not shop on tax-free weekend, because the crowds aren't worth it for them. As a crazy bargain-hunter, this is inconceivable to me. "I WILL BATTLE THE CROWDS! I

"The Boston Tea Party." Or, "The
breaking point of tax elasticity."

WILL SAVE SMALL AMOUNTS OF MONEY! I WILL BUY AN EXTRA PAIR OF SHOES!" tends to be my mantra. But, if you have people who purposely avoid tax-free weekend, then neither stores nor the government are putting all of their revenue-driving eggs in a single basket. This illustrates the price elasticity of sales tax, or what people are willing to trade to not pay tax.

Fifth, tax-free weekend is a great political move. Especially now that it's established, people expect it, which means they anticipate it with joy and would cry foul were it abolished. That helps promulgate an overall attitude of lower taxation, because it creates a more direct correlation between public approval and tax rates. Otherwise, the problem of decentralized costs and aggregated benefits arises: if the tax rate goes up by 1%, it's a small harm to everyone, but potentially a large revenue raise. After a few moves like this, though, people have a high tax rate and are truly struggling, but the gradual

He loves gradual change. And flies.

change has prevented them from caring enough to hold politicians accountable. Politicians thus enjoy the continued benefit of cutting taxes without having to go through the political process of cutting them anew.

Most importantly, for one glorious weekend, Texas is even more of a bastion of liberty than usual. Instead of a nanny state that insists that it needs additional tax dollars to provide back-to-school supplies for everyone's children, we have a weekend in which families are encouraged to take care of their own children, and given tax incentives for doing so. At the end of the day, a government that lets people decide how to spend their own money is a government that believes in liberty.